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A Bailout Deal

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The NYT and WSJ have writeups of an apparent deal in principle on the bailout plan:

  • Update (3:15AM): I think I pulled the trigger too fast in believing that equity warrants were a done deal. He's got a point. The language is suspiciously vague and until we actually see something on paper, there's every reason to be suspicious. Without equity warrants, it's hard to envision the deal as anything other than a corporate boondoggle.
  • There will be equity warrants. Without equity warrants, the plan would almost certainly be terrible for taxpayers, but with equity warrants, there's a reasonable chance we'll ultimately see a profit. As I understand it, what equity warrants do is create a scenario where if the government purchases a loan, and that loan goes bad, then the government aquires an equity stake in the firm that sold it the loan. That way, if the firm ends up prospering, the government still makes money, even though the loan went bad. This in turn allows the government to justify paying a higher price for the loans. That's important because at current market prices, most firms won't sell their toxic debt -- doing so would generate huge writedowns, sending them into bankruptcy. Because equity warrants allow the government to justify higher prices for the debat, the firms are more likely to sell the loans, clearing the financial system of the toxic debt -- which is the whole point of the bailout.
  • There will be increased oversight, both from Congress and an independent board.
  • There will be caps on excutive pay for companies that participate, though House Republicans are fighting to weaken these provisions
  • There will be an insurance program favored by House Republicans, but only as an option -- an option that most expect will not be used by any firms, because it will be extremely expensive.
  • House Republicans continue to fight against Democratic proposal that 20% of any eventual profits be directed towards homeownership programs.
  • It's still possible that there will be changes to bankruptcy rules to allow bankruptcy judges to change the terms of mortgages for owners of a single home.
  • There is still discussion of some sort of fee applied to larger financial institutions to help cover the costs of this bailout. It's unclear to me how this would work in the eventuality that the bailout actually made money for the government.